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There are two different types analysis used by two different types of investors or traders. One set uses Fundamentals to analyse and make their decision whether to invest in a particular stock or not. Another set uses Technical indicators driven by past stock performance to make their decision. Technical indicators are very much used by Day traders, Swing investors and momentum investors.

There is no shortage of technical indicators available for the modern trader. In fact, regardless of how long you have been trading you will likely run across new indicators on a constant basis. While there are hundreds of potential indicators to choose from, you don’t have to lose any sleep at night worrying that there is a perfect indicator out there that you are unaware of because the perfect indicator simply does not exist. The key is to identify a few good indicators that relate to your trading style and incorporate them into your trading.

Even after a new trader accepts the fact that there is not a perfect indicator, there is a natural inclination to wonder which indicators are the best. The key with any indicator is to understand how it works and actually use it in its proper manner. You do not have to become an expert on every indicator to succeed at trading. Simply understanding and incorporating one into your trading can make a difference. In fact, the use of too many indicators can lead to paralysis by analysis!

Here is a list of some of the most popular indicators with a brief description.

Fast Stochastic Oscillator
How it Works: The Fast Stochastic Oscillator attempts to identify potential overbought and oversold conditions for a stock. When the lines cross into or out of the respective zones, they are interpreted as possible confirmation signals. The overbought zone is represented by measurements above 80 and the oversold zones are represented by measurements below 20. Potential confirmation signals exist when a break occurs from these zones. For example, when the stochastic oscillator has been below 20 and then breaks above, it can be a potential confirmation for a bullish strategy.

MACD (Moving Average Convergence/Divergence)
How it Works: It can be useful in helping confirm a stock’s momentum, trend direction, potential support and resistance levels, and aid in entry and exit confirmation signals. As a general rule, the zero line is the equilibrium line. If the indicator is above the zero line, it is considered bullish and if it is below the zero line, it is considered bearish. Bullish signifies that the 12-day moving average is higher than the 26-day moving average. Bearish, the12-day moving average is below the 26-day moving average.

The MACD has many potential confirmation signals. These can include crossovers of signal lines, crossovers of the zero equilibrium line, and divergences between the price of the stock and the MACD. Also, when the indicator is at extreme levels on either side of the zero line, the stock or index can be considered either overbought or oversold and prices will soon return to more realistic levels.

On-Balance Volume
How it works: It is a momentum indicator that is primarily used to confirm trends. It does this by taking price and volume into a formula and delivering it as a summary line. It is also read as a price versus volume convergence and divergence indicator.

Price ROC (Rate-of-Change)
How it works: Helps determine change in price direction. As price increases, the ROC increases and as price falls, the ROC falls. Traders can compare the price percentage highs and lows against present highs and lows to gauge the degree to which a stock is overbought or oversold. Confirmation bullish plays often occur when the line crosses upward through the zero line and potential bearish plays are confirmed when the opposite occurs.

RSI (Relative Strength Index)
How it works: The RSI assesses present price relative to historic price (usually 14 days). The scale of the indicator ranges between 0-100. At 50, the indicator suggests that the stock is neutral. Values above 50 are considered positive momentum and values below 50 considered negative momentum. When the RSI line is below 30, it can indicate a market bottom and oversold conditions. Potential confirmation for bullish strategies occurs when the RSI line is below 30 and emerges up through the zone. When the RSI line is above 70, it can indicate a market top and over bought conditions. Potential confirmation for bearish strategies occurs when the RSI line is above 70 and crosses down from that zone.

Slow Stochastic Oscillator
How it works: This indicator gets the derogatory slow title simply because its counterpart (the fast stochastic) uses more near-term price sensitive information. This indicator attempts to identify overbought and oversold conditions. When the lines cross into or out of the respective zones, they are interpreted as possible confirmation signals. The overbought zone is represented by measurements above 80 and the oversold zones are represented by measurements below 20. Potential confirmation signals exist when a break occurs from these zones. For example, when the stochastic oscillator has been below 20 and then breaks above, it can be a potential confirmation for a bullish strategy.

Ultimate Oscillator
How it works: The ultimate oscillator attempts to identify potential overbought and oversold levels. It has values from 0-100 with potential oversold levels identified below 30 and potential overbought levels above 70. Many traders will wait from the Ultimate Oscillator line to leave an overbought (for bearish trades) or oversold zone (for bullish trades) as confirmation to enter a trade. Conversely, when the ultimate oscillator rises above 70 traders can use this as a confirmation to exit bullish trades and when it falls below 30 they can use it as confirmation to exit bearish trades.

William’s %R
How it works: It is used to help predict potential market reversals by identifying overbought and oversold levels. Potential oversold levels are indicated with a measurement of –80 to –100%, while potential overbought levels measure from 0 to –20%. A note of caution should be made as William’s %R is vulnerable to strong trending stocks.

Summary
It should be emphasized again, that all of the potential trade signals that indicators provide should never be used independently to enter or exit a trade. Do not simply enter a trade because the MACD crosses the zero line or because the Williams %R is currently at -90. Indicators are best used when used in conjunction with a larger trading strategy and plan. My favorite indicators are MACD, RSI and William’s %R.I rarely use Oscillators which is bit complicated to understand as per my experience. You find your nitch by trying out different indicators and sticking with few of your favorites.

Source courtesy: Rich Dad Education